<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 20, 1998
-----------------
STAR GAS PARTNERS, L.P.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
- -------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
33-98490 06-1437793
------------------------ ------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
2187 Atlantic Street Stamford, Connecticut, 06902
- -------------------------------------------------------------------------------
(Address of principal executive office)
(203) 328-7300
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
Item 1. Change in Control of Registrant
None.
Item 2. Acquisition or Disposition of Assets
None
Item 3. Bankruptcy or Receivership
None.
Item 4. Change in Registrant's Certifying Accountant
None.
Item 5. Other Events
Star Gas Partners, L.P. a Delaware partnership (the "Reporting
Person") is filing pursuant to this form 8-K certain historical
financial statements (the "Petro Financial Statements") of Petroleum
Heat and Power Co., Inc. a Minnesota corporation ("Petro") (SEC File No.
1-9358) as listed in Item 7, in order to permit the Reporting Person to
incorporate the Petro Financial Statements in the Reporting Person's
future SEC filings.
Item 6. Registration of Registrant's Directors
None.
Item 7. Financial Statements and Exhibits
The consolidated financial statements of Petroleum Heat and Power
Co., Inc. as of December 31, 1996 and 1997 and for each of the years in
the three-year period ended December 31, 1997 are filed as Exhibit 99.1
to this Current Report.
The consolidated financial statements of Petroleum Heat and Power
Co., Inc. as of September 30, 1998 and December 31, 1997 and for the
three and nine month periods ended September 30, 1997 and 1998
(unaudited) are filed as Exhibit 99.2 to this Current Report.
Schedule II--Valuation and Qualifying Accounts--Years ended
December 31, 1995, 1996 and 1997.
Item 8. Changes in Fiscal Year
None.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
Star Gas Partners, L.P.
By: Star Gas Corporation (General Partner)
/s/ Joseph P. Cavanaugh
-----------------------
By: Joseph P. Cavanaugh
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the date
indicated:
Signature Title Date
--------- ----- ----
/s/ Joseph P. Cavanaugh President November 20, 1998
- ----------------------- Star Gas Corporation
Joseph P. Cavanaugh (Principal Executive Officer)
/s/ Richard F. Ambury Vice President - Finance November 20, 1998
- --------------------- Star Gas Corporation
Richard F. Ambury Principal Financial and
Accounting Officer))
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ------------------------ ----------------------------------------- ----------
<S> <C> <C>
99.1 The consolidated financial statements of 5
Petroleum Heat and Power Co., Inc. as of
December 31, 1996 and 1997 and for each
of the years in the three year period
ended December 31, 1997 and related
schedule.
99.2 The consolidated financial statements of 30
Petroleum Heat and Power Co., Inc. as of
September 30, 1998 and December 31, 1997
and for the three and nine month periods
ended September 30, 1997 and 1998
(unaudited).
</TABLE>
4
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of
Petroleum Heat and Power Co., Inc.:
We have audited the accompanying consolidated balance sheets of
Petroleum Heat and Power Co., Inc. and subsidiaries as of December 31, 1996 and
1997, and the related consolidated statements of operations, changes in
stockholders' equity (deficiency) and cash flows for each of the years in the
three-year period ended December 31, 1997. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Petroleum Heat and Power Co., Inc. and subsidiaries as of December 31, 1996 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
March 20, 1998
5
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except per share data)
DECEMBER 31,
--------------------
ASSETS 1996 1997
- ------ --------- ---------
<S> <C> <C>
Current assets:
Cash $ 3,257 $ 2,390
Restricted cash 3,000 -
Accounts receivable (net of allowance of $1,088 93,362 78,987
and $980)
Inventories 22,084 16,285
Prepaid expenses 7,008 6,203
Notes receivable and other current assets 1,299 1,259
--------- ---------
Total current assets 130,010 105,124
--------- ---------
Property, plant and equipment - net 30,666 30,615
Intangible assets (net of accumulated amortization
of $283,486 and $285,850)
Customer lists 77,778 69,265
Deferred charges 25,718 24,924
--------- ---------
103,496 94,189
--------- ---------
Investment in and advances to the Star Gas Partnership 29,907 27,499
Deferred gain on Star Gas Transaction (19,964) (19,964)
--------- ---------
9,943 7,535
--------- ---------
Cash collateral account - 9,350
Other assets 910 1,033
--------- ---------
$ 275,025 $ 247,846
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
- -------------------------------------------------
Current liabilities:
Working capital borrowings $ 22,000 $ 3,000
Current debt 3,047 2,391
Current maturities of redeemable preferred stock 4,167 4,167
Accounts payable 18,988 14,759
Customer credit balances 17,468 20,767
Unearned service contract revenue 15,388 15,321
Accrued expenses and other liabilities 30,859 32,283
--------- ---------
Total current liabilities 111,917 92,688
--------- ---------
Supplemental benefits and other long-term liabilities 1,584 5,043
Pension plan obligation 7,587 5,702
Notes payable and other long-term debt 16,787 16,507
Senior notes payable 34,150 63,100
Subordinated notes payable 240,400 209,350
Redeemable and exchangeable preferred stock 8,333 32,489
Common stock redeemable at option of stockholder (124
Class A and 31 Class C shares and 83 Class A and 21
Class C shares) 984 656
Note receivable from stockholder (984) (656)
Stockholders' equity (deficiency):
Class A common stock-par value $.10 per share; 40,000
shares authorized, 22,931 and 23,606 shares issued
and outstanding 2,294 2,361
Class B common stock-par value $.10 per share; 6,500
shares authorized, 11 and 11 shares issued and
outstanding 1 1
Class C common stock-par value $.10 per share; 5,000
shares authorized, 2,567 and 2,577 shares issued
and outstanding 257 258
Additional paid-in capital 78,804 81,358
Deficit (221,024) (256,365)
Minimum pension liability adjustment (6,065) (4,646)
--------- ---------
Total stockholders' equity (deficiency) (145,733) (177,033)
--------- ---------
$ 275,025 $ 247,846
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- ---------- ---------
<S> <C> <C> <C>
Net sales $609,507 $608,161 $548,141
Cost of sales 387,825 427,388 379,748
-------- -------- --------
GROSS PROFIT 221,682 180,773 168,393
Selling, general and administrative 128,295 105,601 102,377
expenses
Direct delivery expense 36,634 33,102 30,006
Restructuring charges - 1,150 2,850
Corporate identity expenses - 2,659 4,136
Pension curtailment expense - 557 654
Amortization of customer lists 20,527 18,611 17,903
Depreciation of plant and equipment 12,374 6,574 7,204
Amortization of deferred charges 6,142 4,760 4,639
Provision for supplemental benefits 1,407 873 565
-------- -------- --------
OPERATING INCOME (LOSS) 16,303 6,886 (1,941)
Other income (expense):
Interest expense (41,084) (34,669) (33,813)
Interest income 2,292 2,257 2,145
Other 218 1,842 11,445
-------- -------- --------
Loss before income taxes, equity
interest and extraordinary item (22,271) (23,684) (22,164)
Income taxes 500 500 500
-------- -------- --------
Loss before equity interest
and extraordinary item (22,771) (24,184) (22,664)
-------- -------- --------
Share of income (loss) of Star Gas 728 2,283 (235)
Partnership -------- -------- --------
Loss before extraordinary item (22,043) (21,901) (22,899)
-------- -------- --------
Extraordinary item-loss on early
extinguishment of debt (1,436) (6,414) -
-------- -------- --------
NET LOSS $(23,479) $(28,315) $(22,899)
======== ======== ========
Preferred Stock dividends (3,263) (2,389) (4,644)
-------- -------- --------
NET LOSS APPLICABLE TO COMMON STOCK $(26,742) $(30,704) $(27,543)
======== ======== ========
Basic and Diluted losses per common
share before extraordinary item:
Class A and C Common Stock $(1.00) $(0.95) $(1.06)
Extraordinary loss per common share:
Class A and C Common Stock (0.06) (0.25) -
Basic and Diluted losses per common
share:
Class A and C Common Stock $(1.06) $(1.20) $(1.06)
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
(In thousands)
COMMON STOCK
--------------------------------------------------
CLASS A CLASS B CLASS C MINIMUM
---------------- ---------------- -------------- ADDITIONAL PENSION
NO. OF NO. OF NO. OF PAID-IN LIABILITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJ. TOTAL
------- ------- ------- ------- ------ ------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
----------------------------------------------------------------------------------------------------
DECEMBER 31, 1994 21,340 $2,134 21 $ 2 2,558 $256 $ 71,036 $(132,953) $(6,651) $ (66,176)
NET LOSS (23,479) (23,479)
CASH DIVIDENDS
DECLARED AND PAID
(SEE NOTES 6 AND 7) (14,718) (14,718)
CASH DIVIDENDS
PAYABLE
(SEE NOTES 6 AND 7) (3,822) (3,822)
REPURCHASE OF CLASS
A COMMON STOCK (1,521) (152) (13,439) (13,591)
CLASS A COMMON
STOCK ISSUED 2,875 288 18,229 18,517
CLASS A COMMON
STOCK ISSUED
UNDER THE DIVIDEND
REINVESTMENT PLAN 18 2 137 139
MINIMUM PENSION
LIABILITY ADJ. 1,779 1,779
OTHER (59) (6) (7) (1) 455 448
BALANCE AT
---------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 22,653 2,266 14 1 2,558 256 76,418 (174,972) (4,872) (100,903)
NET LOSS (28,315) (28,315)
CASH DIVIDENDS
DECLARED AND PAID
(SEE NOTES 6 AND 7) (13,880) (13,880)
CASH DIVIDENDS
PAYABLE
(SEE NOTES 6 AND 7) (3,857) (3,857)
CLASS A COMMON
STOCK ISSUED
UNDER THE DIVIDEND
REINVESTMENT PLAN 302 30 2,034 2,064
MINIMUM PENSION
LIABILITY ADJ. (1,193) (1,193)
OTHER (24) (2) (3) - 9 1 352 351
BALANCE AT
---------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 22,931 2,294 11 1 2,567 257 78,804 (221,024) (6,065) (145,733)
NET LOSS (22,899) (22,899)
CASH DIVIDENDS
DECLARED AND PAID
(SEE NOTES 6 AND 7) (10,479) (10,479)
CASH DIVIDENDS
PAYABLE
(SEE NOTES 6 AND 7) (1,963) (1,963)
CLASS A COMMON
STOCK ISSUED
UNDER THE DIVIDEND
REINVESTMENT PLAN 691 69 2,331 2,400
MINIMUM PENSION
LIABILITY ADJ. 1,419 1,419
OTHER (16) (2) 10 1 223 222
BALANCE AT
--------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 23,606 $2,361 11 $ 1 2,577 $258 $ 81,358 $(256,365) $(4,646) $(177,033)
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(In thousands) YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
- -----------------------------------------------
Net loss $(23,479) $(28,315) $(22,899)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of customer lists 20,527 18,611 17,903
Depreciation of plant and equipment 12,374 6,574 7,204
Amortization of deferred charges 6,142 4,760 4,639
Share of (income)loss of Star Gas (728) (2,283) 235
Provision for losses on accounts receivable 1,856 1,882 1,853
Provision for supplemental benefits 1,407 873 565
Loss on early extinguishment of debt 1,436 6,414 -
Gain on sale of business (788) (1,781) (11,284)
Other 544 105 (186)
Change in Operating Assets and Liabilities, net
of effects of acquisitions and dispositions:
Decrease (increase) in accounts receivable (19,285) 117 12,522
Decrease (increase) in inventory (3,391) (1,671) 5,799
Decrease (increase) in other current assets (430) (575) 845
Decrease (increase) in other assets 240 (86) (123)
Increase (decrease) in accounts payable 5,872 (3,836) (4,229)
Increase (decrease) in customer credit
balances (5,938) (2,142) 3,299
Increase (decrease) in unearned service
contract revenue 1,201 (147) (67)
Increase (decrease) in accrued expenses 733 (2,352) 2,568
-------- -------- --------
Net cash provided by (used in) operating
activities (1,707) (3,852) 18,644
-------- -------- --------
Cash flows from (used in) investing activities:
- -----------------------------------------------
Sale of Star Gas limited partnership interest 51,046 - -
Minimum quarterly distributions from Star Gas
Partnership - 4,313 5,507
Acquisitions (26,438) (28,493) (16,252)
Capital expenditures (11,174) (6,874) (6,980)
Proceeds from sale of business 1,477 4,073 15,571
Net proceeds from sales of fixed assets 1,702 788 1,174
-------- -------- --------
Net cash provided by (used in) investing
activities: 16,613 (26,193) (980)
-------- -------- --------
Cash flows from (used in) financing activities:
- -----------------------------------------------
Net proceeds from Star Gas Corporation debt
offering 83,687 - -
Net proceeds from issuance of common stock 18,656 2,064 2,400
Net proceeds from issuance of preferred stock - - 28,323
Net proceeds from issuance of subordinated
notes 120,350 - -
Repayment of notes payable (80,206) (1,050) (1,050)
Redemption of preferred stock (24,133) (4,167) (4,167)
Repurchase of common stock (14,150) (39) -
Repurchase of subordinated notes - (49,612) (1,050)
Credit facility borrowings 20,000 51,000 16,000
Credit facility repayments (49,100) (29,000) (35,000)
Decrease (increase) in restricted cash (6,000) 3,000 3,000
Cash collateral account payment - - (9,350)
Cash dividends paid (18,201) (17,702) (14,336)
Other (2,998) 523 (3,301)
-------- -------- --------
Net cash provided by (used in) finacincing
activities: 47,905 (44,983) (18,531)
-------- -------- --------
Net increase (decrease) in cash 62,811 (75,028) (867)
Cash at beginning of year 15,474 78,285 3,257
-------- -------- --------
Cash at end of year $ 78,285 $ 3,257 $ 2,390
======== ======== ========
Supplemental Disclosure of Cash Flow
- ------------------------------------
Information:
-----------
Cash paid during the year for:
Interest $ 35,122 $ 37,007 $ 33,879
Income taxes 3,255 215 140
Noncash investing and financing activities:
Issuance of notes payable 8,000 - -
Acquisitions (8,000) - (26,467)
Asset conveyance to Star Gas - - 26,467
Star Gas units received pursuant to asset
conveyance - - (3,467)
Increase in tax liability from asset conveyance - - 3,467
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Petroleum Heat and
Power Co., Inc. ("Petro") and its subsidiaries ("the Company"), each of which is
wholly owned. The Company currently operates in twenty-five major markets in the
Northeast, including the metropolitan areas of Boston, New York City, Baltimore,
Providence, and Washington DC serving approximately three hundred and fifty
thousand customers in those areas. Credit is granted to substantially all of
these customers with no individual account comprising a concentrated credit
risk.
The Company is primarily engaged in the retail distribution of #2 home heating
oil, related equipment services, and equipment sales to residential and
commercial customers. It operates from 23 branches / depots and 18 satellites
primarily in the Northeast United States. #2 home heating oil is principally
used by the Company's residential and commercial customers to heat their homes
and buildings, and as a result, weather conditions have a significant impact on
the demand for the product. Actual weather conditions can vary substantially
from year to year, and accordingly can significantly affect the Company's
performance.
Use of Estimates
- ----------------
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories
- -----------
Inventories are stated at the lower of cost or market using the first-in, first-
out method. The components of inventories were as follows at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Fuel oil $14,066 $ 9,246
Parts and equipment 8,018 7,039
------- -------
$22,084 $16,285
======= =======
</TABLE>
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Customer Lists and Deferred Charges
- -----------------------------------
Customer lists are recorded at cost less accumulated amortization. Amortization
for the fuel oil customer lists is computed using the straight-line method with
90% of the cost amortized over six years and 10% of the cost amortized over 25
years. Amortization for propane customer lists was computed using the straight-
line method with cost amortized over fifteen years.
Deferred charges include goodwill, acquisition costs and payments related to
covenants not to compete. The covenants are amortized using the straight-line
method over the terms of the related contracts; acquisition costs are amortized
using the straight-line method over a six-year period; while goodwill is
amortized using the straight-line method over a twenty-five year period. Also
included as deferred charges are the costs associated with the issuance of the
Company's subordinated debt. Such costs are being amortized using the interest
method over the lives of the instruments.
The Company assesses the recoverability of intangible assets at the end of each
fiscal year and, when appropriate, at the end of each fiscal quarter, by
comparing the carrying values of such intangibles to market values, where a
market exists, supplemented by cash flow analyses to determine that the carrying
values are recoverable over the remaining estimated lives of the intangibles
through undiscounted future operating cash flows. When an intangible asset is
deemed to be impaired, the amount of impairment is measured based on market
values, as available, or by projected operating cash flows, using a discount
rate reflecting the Company's assumed average cost of funds.
10
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Advertising Expenses
- --------------------
Advertising costs are expensed as they are incurred. Advertising expenses were
$2,352, $2,947, and $3,294 for 1995, 1996, and 1997 respectively.
Issuance of Stock by Subsidiaries
- ---------------------------------
At the time a subsidiary sells its stock to an unrelated party a gain is
recognized only if there are no significant uncertainties regarding realization.
Customer Credit Balances
- ------------------------
Customer credit balances represent payments received from customers pursuant to
a budget payment plan (whereby customers pay their estimated annual fuel charges
on a fixed monthly basis) in excess of actual deliveries billed.
Revenue Recognition
- -------------------
Sales of fuel oil and heating equipment are recognized at the time of delivery
of the product to the customer or at the time of sale or installation. Revenue
from repairs and maintenance service is recognized upon completion of the
service. Payments received from customers for heating equipment service
contracts are deferred and amortized into income over the terms of the
respective service contracts, on a straight line basis, which generally do not
exceed one year.
Concentration of Revenue with Guaranteed Maximum Price Customers
- ----------------------------------------------------------------
Approximately 25% of the Company's heating oil volume is sold to individual
customers under an agreement pre-establishing the maximum sales price of oil
over a twelve month period. The maximum price at which oil is sold to these
capped-price customers is renegotiated in the Spring of each year in light of
then current market conditions. The Company currently enters into forward
purchase contracts and futures contracts for a substantial majority of the oil
it sells to these capped-price customers in advance and at a fixed cost. Should
events occur after a capped-sales price is established that increases the cost
of oil above the amount anticipated, margins for the capped-price customers
whose oil was not purchased in advance would be lower than expected, while those
customers whose oil was purchased in advance would be unaffected. Conversely,
should events occur during this period that decrease the cost of oil below the
amount anticipated, margins for the capped-price customers whose oil was
purchased in advance could be lower than expected, while those customers whose
oil was not purchased in advance would be unaffected or higher than expected.
The Company purchases put options to hedge the risk associated with a decrease
in heating oil prices in situations where forward purchase contracts and futures
contracts have been entered into to match capped-price customer commitments.
Should the market price of heating oil decline below the forward purchase
contract or futures contract price, these options would substantially offset the
effects of such decline. The cost of acquiring these options is recognized in
cost of goods sold over the life of each option agreement.
In accordance with SFAS No. 80, "Accounting for Futures Contracts," futures
contracts are classified as a hedge when the item to be hedged exposes the
company to price risk and the futures contract reduces that risk exposure.
Future contracts that relate to transactions that are expected to occur are
accounted for as a hedge when the significant characteristics and expected terms
of the anticipated transactions are identified and it is probable that the
anticipated transaction will occur. If a transaction does not meet the criteria
to qualify as a hedge, it is considered to be speculative. Any gains or losses
associated with futures contracts which are classified as speculative are
recognized in the current period. If a futures contract that has been accounted
for as a hedge is closed or matures before the date of the anticipated
transaction, the accumulated change in value of the contract is carried forward
and included in the measurement of the related transaction. Option contracts
are accounted for in the same manner as futures contracts. At December 31, 1996
there were no futures contracts outstanding, and at December 31, 1997 the
Company had futures contracts to buy #2 home heating oil with notional amounts
totaling $11,925 and futures contracts to sell #2 home heating oil with notional
amounts totaling $5,061.
11
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Concentration of Revenue with Guaranteed Maximum Price Customers - (Continued)
- ------------------------------------------------------------------------------
At December 31, 1996 the Company had put options outstanding with an aggregate
notional value of $12,088 to hedge the risk associated with approximately 66% of
the 32.9 million gallons of heating oil forward purchase contracts.
Additionally, the Company had put options outstanding at December 31, 1997 with
an aggregate notional value of $14,438 to hedge the risk associated with
approximately 60% of the 33.8 million gallons of heating oil forward purchase
contracts and 11.6 million gallons under futures contracts, and expire at
various times with no option expiring later than April 1998. The unrealized
gains (losses) on these options was not significant at December 31, 1996 and
1997. The carrying amount of these options at December 31, 1996 and 1997 was
$258 and $488 respectively, and were included in Prepaid Expenses on the
Consolidated Balance Sheet. The risk that counterparties to such instruments
may be unable to perform is minimized by limiting the counterparties to major
oil companies and major financial institutions. The Company does not expect any
losses due to such counterparty default.
Environmental Costs
- -------------------
The Company expenses, on a current basis, costs associated with managing
hazardous substances and pollution in ongoing operations. The Company also
accrues for costs associated with the remediation of environmental pollution
when it becomes probable that a liability has been incurred and the amount can
be reasonably estimated.
Income Taxes
- ------------
The Company files a consolidated Federal Income Tax return with its
subsidiaries. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Pensions
- --------
The Company funds accrued pension costs currently on its pension plans, all of
which are noncontributory.
Basic and Diluted Earnings (Losses) per Common Share
- ----------------------------------------------------
The company computes basic and diluted earnings per share in accordance with the
requirements of the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 128 - "Earnings Per Share". As the
impact of converting dilutive securities would be antidilutive, the computation
treats such conversions as having no effect and presents basic and diluted
earnings per share as the same amount (see note 18).
Accounting Changes
- ------------------
In February 1997, the FASB issued SFAS No. 128 - "Earnings Per Share." SFAS No.
128 requires presentation of "basic" and "diluted" earnings per share for
periods ending after December 15, 1997. The Company adopted SFAS No. 128 and
had no effect on previously reported earnings (losses) per share.
In February 1997, the FASB issued SFAS No. 129 - "Disclosure of Information
about Capital Structure." SFAS No. 129 requires disclosure of all the pertinent
rights and privileges of securities outstanding for periods ending after
December 15, 1997. The Company adopted SFAS No. 129, which had no effect on
previous disclosures.
In June 1997, the FASB issued SFAS No. 130 - "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying changes in
equity that results from non-owner transactions and events. This statement is
effective for fiscal years beginning after December 15, 1997 and will be
reflected in the Company's First Quarter Report on Form 10-Q.
In June 1997 the FASB issued SFAS No. 131 - "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires disclosures about
segments of an enterprise and related information such as the different types of
business activities and economic environments in which a business operates.
This statement is effective for fiscal years beginning after December 15, 1997.
The Company is still assessing the disclosure requirements of SFAS No. 131.
12
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(2) STAR GAS INVESTMENT
In December 1993, the Company acquired an approximate 29.5% equity interest
(42.8% voting interest) in Star Gas for $16.0 million in cash. Each of the
other investors in Star Gas granted the Company an option, exercisable to
December 31, 1998, to purchase such investor's interest in Star Gas. In
December 1994, the Company exercised its right to purchase the remaining
outstanding common equity of Star Gas by paying $3.8 million in cash and issuing
approximately 2.5 million shares ($22.1 million) of the Company's Class A Common
Stock. The Company also incurred $0.9 million of acquisition related cost in
connection with the Star Gas acquisition. The acquisition was accounted for as
a purchase and accordingly the purchase price was allocated to the underlying
assets and liabilities based upon the Company's estimate of their respective
fair value at the date of acquisition. The fair value of assets acquired was
$141.3 million (including $3.3 million in cash) and liabilities and preferred
stock was $109.5 million. The excess of the purchase price over the fair value
of assets acquired and liabilities assumed was $9.0 million and was being
amortized over a period of twenty-five years.
The Company's investment in Star Gas Corporation was accounted for using the
equity method from December 23, 1993 to December 7, 1994, at which time the
Company exercised its right to purchase the remaining outstanding common equity
of Star Gas (the "Star Gas Acquisition"). From December 8, 1994 to December 19,
1995 while Star Gas was a wholly owned subsidiary of Petro, Star Gas operations,
assets and liabilities were included in the consolidated financial statements of
the Company.
In November 1995, Star Gas organized Star Gas Partners, L.P. a Delaware limited
partnership ("Partnership") and Star Gas and the Partnership together organized
Star Gas Propane, L.P., a Delaware limited partnership ("Operating
Partnership"). In December 1995, Petro transferred substantially all of its
propane assets and liabilities to Star Gas, and Star Gas transferred ("Star Gas
Conveyance") substantially all of its assets (including the propane assets
transferred by Petro) in exchange for a general partnership interest in the
Operating Partnership and the assumption by the Operating Partnership of
substantially all of the liabilities of Star Gas. The total value of the assets
conveyed to the Operating Partnership was $156.5 million. Concurrently with the
Star Gas Conveyance, Star Gas issued approximately $85.0 million in First
Mortgage Notes to certain institutional investors. In connection with the Star
Gas Conveyance, the Operating Partnership assumed $91.5 million of Star Gas
liabilities including the $85.0 million of First Mortgage Notes; however, Star
Gas retained approximately $83.7 million in cash from the proceeds of the First
Mortgage Notes. As a result of the foregoing transactions ("1995 Star Gas
Transaction"), Star Gas received a 46.5% equity interest in the Partnership, and
Petro received distributions from the public sale of 2.6 million Master Limited
Partnership units at $20.46 per share for $51.0 million in cash. In order for
the Partnership to begin operations with $6.2 million of working capital, Star
Gas and the Operating Partnership agreed that the amount of debt assumed by the
Operating Partnership would be adjusted upward or downwards to the extent that
the working capital of the Operating Partnership at closing was more or less
than $6.2 million. At closing, the net working capital of the Operating
Partnership was $9.2 million and as a result, $3.0 million was paid to Petro in
January 1996.
In accordance with the Company's accounting policies, the Company deferred the
gain of approximately $20.0 million for this transaction because the Company
holds subordinate units which do not have a readily ascertainable market price
creating an uncertainty regarding realization, and due to the fact that Star Gas
as general partner had a $6.0 million additional capital contribution obligation
to enhance the Partnership's ability to make quarterly distributions on the
common units (at December 31, 1997, these funds were no longer restricted at the
Star Gas level and had been released to Petro since the quarterly guarantee
provisions were fulfilled). The Company will recognize the gain from this
transaction when the Company's subordinated units convert into common units in
accordance with the terms of the partnership agreement. In general, full
conversion of subordinated units to common units will take place no earlier than
the first day of any quarter beginning on or after January 1, 2001, based upon
the satisfaction of certain performance criteria for a period of at least three
non-overlapping consecutive four-quarter periods immediately preceding the
conversion date.
13
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(2) STAR GAS INVESTMENT (CONTINUED)
In October 1997, Star Gas acquired the outstanding stock of an unaffiliated Ohio
propane company ("1997 Star Gas Transaction") and in an equal exchange
subsequently transferred all of such assets to the Partnership for the
assumption of $23 million of debt incurred by Star Gas in connection with this
acquisition, a 0.00027% general partnership interest in the Partnership along
with 148 Partnership common units, and the assumption by Star Gas of
approximately $3.5 million of future income tax liabilities resulting from this
asset conveyance. Subsequently in December 1997, the Company sold 24 common
units and in January 1998 sold 63 common units.
As a result of the 1997 Star Gas Transaction, at December 31, 1997 the Company
had a 41.66% equity interest in the Partnership, which was reduced to 40.66%
after the January 1998 sale of common units, which is being accounted for by the
equity method. Additionally, the Partnership's secondary public offering in
December 1997 resulted in a difference of $2.4 million between the Company's
carrying value of its investment in the Partnership and its ownership percentage
of the underlying net assets of the Partnership, which is being amortized to
income over twenty-five years.
(3) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment and their estimated useful lives
were as follows at the indicated dates:
<TABLE>
<CAPTION>
December
------------------ Estimated
1996 1997 Useful Lives
-------- -------- --------------
<S> <C> <C> <C>
Land $ 2,049 $ 2,088
Buildings 6,030 5,641 20-45 years
Fleet and other equipment 38,480 38,065 3-7 years
Tanks and equipment 1,438 1,460 8-30 years
Furniture and fixtures 18,436 18,678 5-7 years
Leasehold improvements 5,820 7,465 Term of leases
------- -------
72,253 73,397
Less accumulated depreciation 41,587 42,782
------- -------
$30,666 $30,615
======= =======
</TABLE>
(4) NOTES PAYABLE AND OTHER LONG-TERM DEBT
Notes payable and other long-term debt, including working capital borrowings and
current maturities of long-term debt, consisted of the following at the
indicated dates:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Notes payable to banks under credit
facility (a) $22,000 $ 3,000
Notes payable in connection with the
purchase of fuel oil dealers and
other notes payable, due in monthly,
quarterly and annual installments with
interest at various rates ranging from
8% to 10% per annum, maturing at
various dates through the year 2004 17,734 16,798
------- -------
39,734 19,798
Less current maturities, including
working capital borrowings 22,947 3,291
------- -------
$16,787 $16,507
======= =======
</TABLE>
a) Pursuant to a Credit Agreement, dated October 15, 1997 as restated and
amended (Credit Agreement), the Company may borrow up to $47.0 million under
a working capital revolving credit facility with a sublimit under a borrowing
base established each month. Amounts borrowed under the working capital
revolving credit facility are subject to a 60 day clean-up requirement during
the period April 1 to September 30 of each year, and this portion of the
Credit Agreement expires on June 30, 1998. The Company expects to renew or
replace this working capital revolving credit facility prior to June 30,
1998. The Company pays a facility fee of 0.375% on the unused portion of this
facility. At December 31, 1997, $3.0 million was outstanding under the
working capital revolving credit facility.
14
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(4) NOTES PAYABLE AND OTHER LONG-TERM DEBT - (CONTINUED)
a) - (Continued)
The Credit Agreement also includes a $16.8 million acquisition letter of
credit facility all of which has been used to support notes given to certain
sellers of heating oil companies. The Credit Agreement provides that on or
prior to June 30, 1998, repayments and/or sinking fund deposits equal to two-
thirds of the initial facility outstanding at September 30, 1996 would be
payable with the final payment due June 30, 1999. In October 1997, in
connection with the Company's sale of its Hartford, Connecticut branch $9.4
million of the proceeds from the sale were set aside to fulfill the June 1998
cash collateral requirement, and the working capital portion of the Credit
Agreement was reduced from $60.0 million to $47.0 million.
Interest under the Credit Agreement is payable monthly on the working capital
revolving credit facility and is based upon a floating rate selected by the
Company of either the Eurodollar Rate or the Alternate Base Rate, plus 0 to 75
basis points on Alternate Base Rate Loans and 125 to 200 basis points on
Eurodollar Loans, based upon the ratio of Consolidated Operating Profit to
Interest Expense (as defined in the Credit Agreement). Eurodollar Rate means
the prevailing rate in the interbank Eurodollar market adjusted for reserve
requirements. Alternate Base Rate means the greater of (i) the prime or base
rate of The Chase Manhattan Bank in effect or (ii) the Federal funds rate in
effect plus 1/2 of 1%. The weighted average rate for 1996 and 1997 was 8.48%
and 7.75% respectively.
The fees for the Credit Agreement acquisition letters of credit range from 175
to 250 basis points based upon the same ratio as that used for the working
capital revolving credit facility. To the extent that the letters of credit
are cash collateralized the fee is reduced to 25 basis points.
Under the terms of the Credit Agreement, the Company is restricted from
incurring any indebtedness except subordinated debt and certain other
indebtedness specifically authorized, if certain ratios of EBITDA to interest
are met. The Company is also restricted from selling, transferring, or
conveying customer lists except, among other exceptions, from a sale where the
net cash proceeds are used to cash collateralize the acquisition letters of
credit. The Credit Agreement also provides that the Company is required to
maintain certain minimum levels of cash flow and EBITDA, as well as certain
ratios of EBITDA to net interest expense. In the event of noncompliance with
certain of the covenants, the bank has the right to declare all amounts
outstanding to be due and payable immediately.
As collateral for the Credit Agreement, the Company granted to the lenders a
security interest in the inventories, receivables, and customer lists,
trademarks and trade names which are carried on the December 31, 1997
Consolidated Balance Sheet at $16.3 million, $79.0 million, and $69.3 million
respectively.
Aggregate annual maturities including working capital borrowings, but excluding
the June 1998 acquisition letter of credit facility cash collateral requirement
which was satisfied by the $9.4 million October 1997 cash collateral account
payment, are as follows as of December 31, 1997:
<TABLE>
<CAPTION>
Years Ending
December 31,
- ------------
<S> <C>
1998 $ 3,291
1999 8,126
2000 8,141
2001 60
2002 60
Thereafter 120
-------
$19,798
=======
</TABLE>
15
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) SENIOR AND SUBORDINATED NOTES PAYABLE
Senior and Subordinated notes payable at the dates indicated, consisted of:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
11.85%, 12.17% and 12.18% Senior Notes (a) $ 60,000 $ 60,000
14.10% Subordinated and Senior Notes (b) 10,400 8,300
10 1/8% Subordinated Notes (c) 50,000 50,000
9 3/8% Subordinated Debentures (d) 75,000 75,000
12 1/4% Subordinated Debentures (e) 81,250 81,250
-------- --------
Total Senior and Subordinated Notes Payable 276,650 274,550
Less short-term Subordinated Notes (b) 1,050 1,050
Less short-term Senior Notes (b) 1,050 1,050
Less long-term Senior Notes (a)(b) 34,150 63,100
-------- --------
Total long-term Subordinated Notes Payable $240,400 $209,350
======== ========
</TABLE>
a) On September 1, 1988, the Company authorized the issuance of $60.0 million of
Subordinated Notes originally due October 1, 1998 bearing interest payable
semiannually at an average rate of 11.96% ("11.96% Notes"). In connection
with the Company's 9 3/8% Subordinated Debenture offering in February 1994
(see note 5d) $30.0 million of the 11.96% Notes became ranked as senior debt.
In February 1997 the Company entered into agreements ("Private Debt
Modification") to among other things, exchange $30.0 million of the 11.96%
Notes then ranked as subordinated debt for senior debt, and to extend the
maturity date of the 11.96% Notes from October 1, 1998 to October 1, 2002
with $15.0 million sinking fund payments due on October 1, 2000 and October
1, 2001 and the remaining $30.0 million balance due on October 1, 2002. The
Company paid approximately $1.1 million in fees and expenses to obtain such
modifications. In addition, effective October 1, 1998, the interest on these
notes will be lowered to 10.9%. All such notes are redeemable at the option
of the Company, in whole or in part upon payment of a premium rate as
defined.
b) On January 15, 1991, the Company authorized the issuance of $12.5 million of
14.10% Subordinated Notes due January 15, 2001 bearing interest payable
quarterly. In connection with the Company's 9 3/8% Subordinated Debenture
offering in February 1994 (see note 5d) $6.25 million of these notes became
ranked as senior debt. The notes are redeemable at the option of the Company,
in whole or in part upon payment of a premium rate as defined. On each
January 15th commencing 1996 and ending January 15, 2000, the Company is
required to repay $2.1 million of these Notes. The remaining principal of
$2.0 million is due on January 15, 2001. No premium is payable in connection
with these required payments.
c) On April 6, 1993, the Company issued $50.0 million of 10 1/8% Subordinated
Notes due April 1, 2003 which are redeemable at the Company's option, in
whole or in part, at any time on or after April 1, 1998 upon payment of a
premium rate as defined. Interest is payable semiannually.
d) On February 3, 1994, the Company issued $75.0 million of 9 3/8% Subordinated
Debentures due February 1, 2006 which are redeemable at the Company's option,
in whole or in part, at any time on or after February 1, 1999 upon payment of
a premium rate as defined. Interest is payable semiannually.
In connection with the offering of its 9 3/8% Subordinated Debentures, the
Company received consents of the holders of a majority of each class of
subordinated debt and redeemable preferred stock (see note 7) to certain
amendments to the respective agreements. In consideration for the consents,
the Company paid holders of certain subordinated debt a cash payment of $0.6
million and caused approximately $42.6 million of the subordinated debt at
December 31, 1994 to be ranked as senior debt. In addition, the Company
agreed to increase dividends on the redeemable preferred stock by $2.00 per
share per annum. The Company also paid approximately $1.5 million in fees and
expenses to obtain such consents.
16
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) SENIOR AND SUBORDINATED NOTES PAYABLE (CONTINUED)
e) On February 3, 1995, the Company issued $125.0 million of 12 1/4%
Subordinated Debentures due February 1, 2005 which are redeemable at the
Company's option, in whole or in part, at any time on or after February 1,
2000 upon payment of a premium rate as defined. On February 5, 1996, a
portion of the proceeds received as a result of the Star Gas MLP Offering
(see note 2) were used to retire $43.8 million of the $125.0 million 12 1/4%
Subordinated Debentures. The Company paid $4.8 million, representing an 11%
premium to retire this portion of the debt. Interest on these debentures is
payable semi-annually.
Expenses connected with the above outstanding offerings, and amendments thereto,
amounted to approximately $15.8 million, which includes $1.2 million paid in
debt consents permitting the Star Gas MLP Offering (see note 2). At December 31,
1996 and 1997, the unamortized balances relating to notes still outstanding
amounted to approximately $8.7 million and $8.4 million respectively, and such
balances are included in Deferred Charges and Pension Costs on the Consolidated
Balance Sheet.
Aggregate annual maturities including sinking fund payments at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
- ------------
<S> <C>
1998 $ 2,100
1999 2,100
2000 17,100
2001 17,000
2002 30,000
Thereafter 206,250
--------
$274,550
========
</TABLE>
Total accrued interest on notes payable, and senior and subordinated notes which
were included in accrued expenses and other liabilities were $10,730 and $10,664
at December 31, 1996 and 1997 respectively.
(6) COMMON STOCK AND COMMON STOCK DIVIDENDS
The Company's outstanding Common Stock consists of Class A Common Stock, Class B
Common Stock and Class C Common Stock, each with various designations, rights
and preferences.
Holders of Class A Common Stock and Class C Common Stock have identical rights,
except that holders of Class A Common Stock are entitled to one vote per share
and holders of Class C Common Stock are entitled to ten votes per share. Holders
of Class B Common Stock do not have voting rights, except as required by law, or
in certain limited circumstances.
The following table summarizes the cash dividends declared on Common Stock and
the cash dividends declared per common share for the years indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Cash dividends declared
Class A $13,716 $13,789 $7,019
Class C 1,559 1,559 779
Cash dividends declared per share
Class A $ .60 $ .60 $ .30
Class C .60 .60 .30
</TABLE>
Under the Company's most restrictive dividend limitation imposed by certain debt
covenants, $26.1 million was available at December 31, 1997 for the payment of
dividends on all classes of Capital Stock. The amount available for dividends is
increased each quarter by 50% of the cash flow, as defined, for the previous
fiscal quarter, and by the new issuance of capital stock. On February 24, 1998,
the Company announced the suspension of cash dividends.
17
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) COMMON STOCK AND COMMON STOCK DIVIDENDS (CONTINUED)
On February 3, 1995, the Company issued 2,875 shares of Class A Common Stock in
a public offering in connection with the issuance of $125.0 million of 12 1/4%
Subordinated Debentures due February 1, 2005 and used a portion of the proceeds
to retire 1,521 shares of Class A Common Stock which shares were issued to a
third party in the Star Gas Acquisition (see note 5e).
On October 1, 1995 the Company began offering a Dividend Reinvestment and Stock
Purchase Plan which provides holders of the Company's Class A Common Stock and
Class C Common Stock a vehicle to reinvest their dividends and purchase
additional shares of Class A Common Stock at a 5% discount from the current
market price without incurring any fees. In addition, optional cash deposits
receive a 3% discount from the market price. Pursuant to the plan offering, 18,
302, and 691 additional Class A Common Shares were issued in 1995, 1996, and
1997 respectively.
(7) REDEEMABLE AND EXCHANGEABLE PREFERRED STOCK
The Company entered into agreements dated as of August 1, 1989 with John Hancock
Mutual Life Insurance Company and Northwestern Mutual Life Insurance Company to
sell up to two hundred and fifty thousand shares of its Redeemable Preferred
Stock, par value $0.10 per share, at a price of one hundred dollars per share,
which shares are exchangeable into Subordinated Notes due August 1, 1999 (1999
Notes).
On August 1 of each year, one-sixth of the number of originally issued shares of
each series of Redeemable Preferred shares outstanding, less the number of
shares of such series previously exchanged for 1999 Notes, are to be redeemed,
with the final redemption occurring on August 1, 1999. The redemption price is
one hundred dollars per share plus all accrued and unpaid dividends to such
August 1. As of December 31, 1996 and 1997, 125 shares and 83 shares
respectively were outstanding of which 42 shares were reflected as current.
In February 1997 the Company issued one million two hundred thousand shares of
its 12 7/8% Exchangeable Preferred Stock (Exchangeable Preferred Stock) due
February 15, 2009, par value $0.10 per share, at a price of twenty-five dollars
per share. The Company incurred $1,678 of offering costs in connection with
this preferred stock issuance. Dividends are payable on these shares on
February 15, May 15, August 15 and November 15 of each year. The liquidation
preference on the Exchangeable Preferred Stock is twenty-five dollars per share,
and they are redeemable at the option of the Company in whole or in part, at any
time on or after February 15, 2002 upon payment of a premium rate as defined.
Subject to certain conditions the Company may also issue an additional eight
hundred thousand shares of Exchangeable Preferred Stock. Also, on any scheduled
dividend payment date on or after February 15, 2000 at the Company's option
these Exchangeable Preferred Stock may be exchanged into 12 7/8% Junior
Subordinated Exchange Debentures due 2009. At December 31, 1997 $30.0 million
of Exchangeable Preferred Stock was outstanding.
Preferred dividends of $3,263, $2,389, and $4,644 were declared on all classes
of preferred stock in 1995, 1996, and 1997 respectively.
Aggregate annual maturities of Redeemable Preferred Stock and Exchangeable
Preferred Stock are as follows as of December 31, 1997:
<TABLE>
<CAPTION>
Years Ended
December 31
- -------------
<S> <C>
1998 $ 4,167
1999 4,167
2000 -
2001 -
2002 -
Thereafter 30,000
-------
$38,334
=======
</TABLE>
18
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) PENSION PLANS
Effective December 31, 1996 the Company consolidated all of its defined
contribution pension plans and froze the benefits for nonunion personnel covered
under defined benefit pension plans. In the third quarter of 1997 the Company
froze the benefits of its New York City union defined benefit pension plan as a
result of operation consolidations. In freezing the defined benefit pension
plans and the New York City union defined benefit pension plan the Company
incurred $557 and $654 in 1996 and 1997 respectively, for pension curtailment
expenses relating to the amortization of certain previously unrecognized pension
costs.
The defined benefit and defined contribution plans covered substantially all of
the Company's nonunion employees. Benefits under the frozen defined benefit
plans were generally based on years of service and each employee's compensation.
Benefits under the consolidated defined contribution plan are based on an
employees compensation. Pension expense under all non-union plans for the years
ended December 31, 1995, 1996 and 1997 was $4,378, $4,350 and $4,036
respectively, net of amortization of the pension obligation acquired.
The following table sets forth the defined benefit plans' funded status, all of
which are underfunded, and amounts recognized in the Company's balance sheets at
the indicated dates:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligations,
including vested benefits of
$28,731 and $28,910 $ 29,323 $ 29,258
======== ========
Projected benefit obligation $(29,323) $(29,258)
Plan assets at fair value (primarily 20,367 22,292
listed stocks and bonds) -------- --------
Projected benefit obligation in (8,956) (6,966)
excess of plan assets
Unrecognized net loss from past
experience different from the
assumed and effects of changes
in assumptions 6,053 5,609
Unrecognized net transitional (65) (52)
obligation
Unrecognized prior service cost due 453 -
to plan amendments
Additional liability (6,441) (5,557)
-------- --------
Accrued pension cost for defined $ (8,956) $ (6,966)
benefit plans ======== ========
</TABLE>
Net pension cost for defined benefit plans for the periods indicated included
the following components:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost-benefits earned during the
period $ 1,459 $ 1,630 $ 116
Interest cost on projected benefit
obligation 2,032 1,974 1,895
Actual return on assets (3,116) (2,058) (2,780)
Net amortization and deferral of losses 2,517 1,299 1,492
------- ------- -------
Net periodic pension cost for defined
benefit plans 2,892 2,845 723
------- ------- -------
Curtailment loss - 557 654
------- ------- -------
Total cost $ 2,892 $ 3,402 $ 1,377
======= ======= =======
Assumptions used in the pension
calculations were:
- ----------------------------------------
Discount rate 7.0% 6.5% 6.5%
Rates of increase in compensation levels 4.0% 4.0% 4.0%
Expected long-term rate of return on
assets 8.5% 8.5% 8.5%
</TABLE>
In addition, the Company made contributions to union-administered pension plans
during the years ended December 31, 1995, 1996 and 1997 of $3,148, $2,996 and
$2,508 respectively.
19
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) PENSION PLANS - (CONTINUED)
The Company recorded an additional minimum pension liability for underfunded
plans of $4,594 as of December 31, 1997, representing the excess of unfunded
accumulated benefit obligations over plan assets. A corresponding amount is
recognized as an intangible asset except to the extent that these additional
liabilities exceed the related unrecognized prior service costs and net
transition obligation, in which case the increase in liabilities is charged as a
reduction of stockholders' equity of $4,646 as of December 31, 1997.
In connection with the purchase of shares of a predecessor company as of January
1, 1979 by a majority of the Company's present holders of Class C Common Stock,
the Company assumed a pension liability in the aggregate amount of $1,512 as
adjusted, representing the excess of the actuarially computed present value of
accumulated vested plan benefits over the net assets available for such
benefits. Such liability, which amounted to $1,108 and $1,134 at December 31,
1997 and 1996 is being amortized over 40 years and is included in supplemental
benefits and other long-term liabilities at those dates.
Under a 1992 supplemental benefit agreement, Malvin P. Sevin, the Company's then
Chairman and Co-Chief Executive Officer, was entitled to receive $25 per month
for a period of one hundred twenty months following his retirement. In the event
of his death, his designated beneficiary is entitled to receive such benefit.
Mr. Sevin passed away in December 1992, prior to his retirement. The amounts
accrued for such benefit payable net of payments made at December 31, 1996 and
1997 were $1,387 and $1,204 respectively and are included in supplemental
benefits and other long-term liabilities on the balance sheets at those dates.
(9) LEASES
The Company leases office space and other equipment under noncancelable
operating leases which expire at various times through 2017. Certain of the real
property leases contain renewal options and require the Company to pay property
taxes.
The future minimum rental commitments at December 31, 1997 for all operating
leases having an initial or remaining noncancelable term of one year or more are
as follows:
<TABLE>
<CAPTION>
Years Ending Operating
December Leases
- -------------- ---------
<S> <C>
1998 $ 4,375
1999 3,890
2000 3,357
2001 2,973
2002 3,001
Thereafter 19,892
-------
$37,488
=======
</TABLE>
Rental expense under operating leases for the years ended December 31, 1995,
1996 and 1997 was $7,624, $6,461 and $7,475 respectively.
(10) INCOME TAXES
Income tax expense was comprised of the following for the indicated periods:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1996 1997
------ ----- -----
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State 500 500 500
----- ----- -----
$ 500 $ 500 $ 500
===== ===== =====
</TABLE>
20
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(10) INCOME TAXES - (CONTINUED)
The sources of deferred income tax expense (benefit) and the tax effects of each
were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Excess of book over tax (tax over
book) depreciation $ 1,624 $ (81) $ (227)
Excess of book over tax amortization
expense (1,139) (2,051) (2,490)
Excess of book over tax vacation
expense (75) (180) (107)
Excess of book over tax restructuring
expense - (206) (618)
(Excess of book over tax) tax over book
bad debt expense 44 (41) 37
(Excess of book over tax) tax over book
supplemental benefit expense (14) (14) 14
Equity in income (loss) of Star Gas (187) 2,597 1,037
Other, net (40) (228) 5
Recognition of tax benefit of net
operating loss to the
extent of current and previous
recognized temporary
differences (7,843) (9,114) (4,491)
Change in valuation allowance 7,630 9,318 6,840
------- ------- -------
$ - $ - $ -
======= ======= =======
</TABLE>
The components of the net deferred tax assets and the related valuation
allowance for 1996 and 1997 using current rates were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1997
--------- ---------
<S> <C> <C>
Net operating loss carryforwards $ 35,199 $ 39,690
Excess of tax over book depreciation (5,041) (4,814)
Excess of book over tax amortization 3,624 6,114
Excess of book over tax vacation expense 1,493 1,600
Excess of book over tax restructuring
expense 206 824
Excess of book over tax supplemental
benefit expense 680 666
Excess of book over tax bad debt expense 370 333
Equity in loss (income) of Star Gas (1,738) (2,775)
Other, net 365 360
-------- --------
35,158 41,998
Valuation allowance (35,158) (41,998)
-------- --------
$ - $ -
======== ========
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's recent history of annual net losses, that a
full valuation allowance is appropriate.
At December 31, 1997, the Company had the following income tax loss
carryforwards for Federal Income Tax reporting purposes:
<TABLE>
<CAPTION>
Expiration
Date
- ------------
<S> <C>
2005 $ 26,651
2006 15,012
2007 1,367
2008 8,400
2009 1,662
2010 23,356
2011 26,554
2012 13,734
--------
$116,736
========
</TABLE>
21
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(11) RELATED PARTY TRANSACTIONS
The Company leased two buildings for a total of $435 from certain related
parties under lease agreements that were established by an independent fair
market rental evaluation. In the fourth quarter of 1997 one of the facilities
was sold to an independent party who continued to rent the property under the
same terms to the Company, while the other was sold and the lease terminated as
part of the 1997 New York Region consolidation.
In October 1986, Irik P. Sevin purchased one hundred sixty-one thousand shares
of Class A Common Stock and forty thousand shares of Class C Common Stock of the
Company for $1,280 (which was the fair market value as established by the
Pricing Committee pursuant to the Stockholders' Agreement). The purchase price
was financed by a note due December 31, 1999. The note requires annual payments
of interest and principal, payable in cash or Class A Common Stock of the
Company, until complete satisfaction. In accordance with the note repayment
schedule and the criteria for stock payment valuation, Mr. Sevin surrendered
fifty-nine thousand Class A Common Shares representing $439 of value, sixty-one
thousand Class A Common Shares representing $411 of value, and sixty-two
thousand Class A Common Shares representing $392 of value in December 1995, 1996
and 1997 respectively. The criteria agreed upon for valuing stock payment for
this transaction is the average market price ten days prior to payment or
$6.3479 per share, whichever is greater. The outstanding balance of the note
was $1,312, $984, and $656 at December 31, 1995, 1996, and 1997 respectively.
Interest accrues on the outstanding balance of the note at the LIBOR rate in
effect for each month plus 0.75%. Mr. Sevin has entered into an agreement with
the Company that he will not sell or otherwise transfer to a third party any of
the shares of Class A Common Stock or Class C Common Stock received pursuant to
this transaction until the note has been paid in full.
The existing holders of Class C Common Stock of the Company have entered into a
Shareholders' Agreement which provides that each will vote his shares to elect
certain designated directors. The Shareholders' Agreement also provides for
first refusal rights to the Company if a holder of Class C Common Stock receives
a bona fide written offer from a third party to buy such holder's Class C Common
Stock.
(12) RESTRUCTURING CHARGES
Late in 1995 the Company completed a study engaged with a leading consulting
firm to help provide a structure for superior customer service, a brand image,
and reduced operating costs. Over the last few years the Company has dedicated
a large amount of effort toward defining the best organizational structure, and
has implemented various initiatives toward achieving this objective.
As part of the initial implementation of this program, Petro undertook certain
business improvement strategies in its Long Island, New York region. These steps
included the consolidation of the region's five home heating oil branches into
one central customer service center and three depots. The regional customer
service center consolidated accounting, credit, customer service and the sales
function into a single new facility in Port Washington, Long Island. All
external communications and marketing previously undertaken in the five branches
were centralized into this one location freeing the three newly configured
depots to focus on oil delivery and heating equipment repair, maintenance and
installation, in mutually exclusive operating territories. The Company incurred
$1.2 million in restructuring expenses in 1996, for costs associated with the
initial implementation of the restructuring program.
In 1997 the Company continued with its restructuring program and combined its
three New York City branches into one new central depot that specialized in
delivery, installation, maintenance, and service functions, and like the Long
Island depots, be supported by the Port Washington facility. The Company also
proceeded with its commitment to define the best possible organizational
structure, by restructuring select branch and corporate responsibilities to
eliminate redundant functions and locate responsibilities where they can best
serve customers and the Company. Toward achieving these strategic intentions
the Company incurred $2.9 million in restructuring expenses in 1997, which
comprised of $2.0 million in termination benefit arrangements with certain
branch and corporate employees and $0.9 million for continuing lease obligations
for unused, non-cancelable, non-strategic facilities. The total unpaid amounts
included in accrued expenses and other liabilities are $605 and $2,421
respectively at December 31, 1996 and 1997.
22
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(13) STOCK OPTIONS
On March 3, 1989, the Company issued stock options to purchase seventy-two
thousand shares of Class A Common Stock and eighteen thousand shares of Class C
Common to Irik P. Sevin and forty-eight thousand shares of Class A Common Stock
and twelve thousand shares of Class C Common Stock to Malvin P. Sevin. The
option price for each such share is $11.25. These options are nontransferable.
Malvin P. Sevin's options expired in March 1994 unexercised while the expiration
date of Irik P. Sevin's options were extended to March 3, 1999.
In March 1994 the Company issued stock options to Irik P. Sevin to purchase one
hundred thousand shares of Class A Common Stock. The option price for each such
share is $8.50, the then market value of the stock on the date the options were
granted. These options are non-transferable and expire on March 31, 2004.
None of the aforementioned options of Irik and Malvin Sevin were granted under a
Stock Option Plan and no other options were authorized at the time the options
were issued. All options granted vested upon issuance and were issued at an
exercise price that was estimated to be fair value at the date of grant.
In June 1994, the Board of Directors and shareholders adopted the Petroleum Heat
and Power Co., Inc. 1994 Stock Option Plan, which authorized one million shares
of the Company's Class A Common Stock to be granted from time to time, and to
vest at various times, to key employees, officers, directors, consultants,
advisers, or agents, who help contribute to the long-term success and growth of
the firm, at prices not less than the fair market value at the date of grant and
at terms not to exceed ten years.
As allowable by SFAS No. 123, the Company will continue to apply APB Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock compensation plan, and accordingly will not recognize
compensation expense for its stock-based compensation plan.
Had compensation cost for this plan been determined based upon the fair value at
the grant date for awards under this plan consistent with the methodology
prescribed under SFAS No. 123, the Company's net loss and loss per share for
1996 and 1997 would have been increased by approximately forty-four thousand
dollars, or $0.0017 per share, and nineteen thousand dollars, or $0.0007 per
share respectively. All options were granted at an amount equal to the quoted
market price of the Company's stock at the date of the grants and vest at
various times with no vesting period exceeding five years. The costs charged
against income for options granted are based on the following assumptions
calculated on a straight line basis over the vesting period of the grants. The
average fair value of the options granted during 1996 was $0.76 per option on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 9.41%, volatility of 27%, risk-free
interest rate of 6.26%, assumed forfeiture rate of 0%, and an average expected
life of 8.19 years. The average fair value of the options granted during 1997
was $0.21 per option on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: dividend yield of 12.97%, volatility of
35%, risk-free interest rate of 6.19%, assumed forfeiture rate of 0%, and an
average expected life of 10 years.
23
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(13) STOCK OPTIONS - (CONTINUED)
Information relating to stock options during 1995, 1996 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
Weighted-Average
Range of Number of Shares Option Price
----------------
Exercise Prices Class A Class C Per Share Total
---------------- ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Shares under option at
December 31, 1994 $ 4.10 to $11.25 1,343 103 $ 7.64 $11,047
Granted $ 8.00 to $ 8.00 50 - 8.00 400
Exercised - - - - -
Expired - - - - -
---------------------------------------------------------
Shares under option at
December 31, 1995 $ 4.10 to $11.25 1,393 103 7.66 11,447
Granted $ 6.87 to $ 7.38 132 - 7.21 955
Exercised - - - - -
Expired $ 7.50 to $ 7.50 24 6 7.50 225
---------------------------------------------------------
Shares under option at
December 31, 1996 $ 4.10 to $11.25 1,501 97 7.62 12,177
Granted $ 3.13 to $ 3.13 15 - 3.13 47
Exercised - - - - -
Expired $ 4.10 to $ 8.77 1,097 79 7.16 8,410
---------------------------------------------------------
Shares under option at
December 31, 1997 $ 3.13 to $11.25 419 18 $ 8.72 $ 3,814
===========================================================
Shares exercisable from $ 6.88 to $ 8.50 209 - $ 8.02 $ 1,673
Shares exercisable from $11.00 to $11.25 117 18 11.17 1,508
-----------------------------------------------------------
Total shares exercisable
at December 31, 1997 $ 6.88 to $11.25 326 18 $ 9.26 $ 3,181
===========================================================
</TABLE>
The weighted average life of the shares exercisable from $6.88 to $8.50 is 4.9
years, and the weighted average life of the shares exercisable from $11.00 to
$11.25 is 1.9 years.
24
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(14) ACQUISITIONS
During 1995, the Company acquired the customer lists and equipment of ten
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately $34,400.
During 1996, the Company acquired the customer lists and equipment of thirteen
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately $28,500.
In June 1996, the Company sold its Springfield Massachusetts operations to an
unaffiliated fuel oil dealer. The Company received proceeds of approximately
$4,100 and realized a gain on this transaction of approximately $1,800.
During 1997, the Company acquired the customer lists and equipment of eleven
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately $16,300.
In November 1997, the Company sold its Hartford Connecticut operation to an
unaffiliated fuel oil dealer. The Company received proceeds of approximately
$15,600 and recognized a gain on this transaction of approximately $11,400.
Sales and net income of the acquired companies are included in the consolidated
statements of operations from the respective dates of acquisition.
Unaudited pro forma data giving effect to the purchased and disposed businesses,
and to the acquisition of Star Gas Corporation, as described in Note 2, as if
they had been acquired on January 1 of the year preceding the year of purchase
and disposal, with adjustments, primarily for amortization of intangibles are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $657,703 $607,240 $538,988
Loss before extraordinary item $(20,889) $(23,029) $(22,397)
Net loss $(22,325) $(29,443) $(22,397)
Preferred stock dividends (3,263) (2,389) (4,644)
-------- -------- --------
Net loss applicable to common
stockholders (Numerator) $(25,588) $(31,832) $(27,041)
======== ======== ========
Class A Common Stock 22,711 22,983 23,441
Class B Common Stock 15 12 11
Class C Common Stock 2,598 2,598 2,598
-------- -------- --------
Weighted average number of shares
outstanding (Denominator) 25,324 25,593 26,050
======== ======== ========
Basic and Diluted losses per common
share before extraordinary item:
Class A and C Common Stock $ (0.95) $ (0.99) $ (1.04)
Extraordinary loss per common share:
Class A and C Common Stock $ (0.06) $ (0.25) $ -
Basic and Diluted losses per common
share:
Class A and C Common Stock $ (1.01) $ (1.24) $ (1.04)
</TABLE>
(15) LITIGATION
The Company is not party to any litigation which individually or in the
aggregate could reasonably be expected to have a material adverse effect on the
Company.
25
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(16) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, Restricted Cash, Accounts Receivable, Notes Receivable and Other Current
- ------------------------------------------------------------------------------
Assets, Working Capital Borrowings, Accounts Payable and Accrued Expenses
- -------------------------------------------------------------------------
The carrying amount approximates fair value because of the short maturity of
these instruments.
Long-Term Debt, Subordinated Notes Payable, Senior Notes Payable and Cumulative
- -------------------------------------------------------------------------------
Redeemable Exchangeable Preferred Stock
- ---------------------------------------
The fair values of each of the Company's long-term financing instruments,
including current maturities, are based on the amount of future cash flows
associated with each instrument, discounted using the Company's current
borrowing rate for similar instruments of comparable maturity.
The estimated fair value of the Company's financial instruments are summarized
as follows:
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1997
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Long-term debt $ 17,734 $ 17,333 $ 16,798 $ 15,853
Subordinated notes payable 241,450 251,940 210,400 197,883
Senior notes payable 35,200 36,965 64,150 64,343
Preferred stock 12,500 13,700 36,656 39,722
</TABLE>
Limitations
- -----------
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
(17) SEGMENT INFORMATION
From December 8, 1994 to December 19, 1995 the operations, assets and
liabilities of Star Gas Corporation ("Star Gas"), a wholly owned subsidiary,
were included in the consolidated financial statements of the Company.
Accordingly, during this period the Company's operations were classified into
two business segments: Home Heating Oil and Propane. However, as a result of the
Star Gas Master Limited Partnership transaction in December 1995 involving the
conveyance of the Company's propane operations to Star Gas Propane, L.P., a
minority owned entity, for the twelve months ended December 31, 1996 and 1997
the Company had no propane revenues or expenses.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1996 Year Ended December 31, 1997
-------------------------------- ----------------------------- -------------------------------
Home Home Home
Heating * Heating ** Heating ***
Oil Propane Consolidated Oil Prop. Consolidated Oil Prop. Consolidated
-------- -------- ------------ -------- ----- ------------ --------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $509,122 $100,385 $609,507 $608,161 $ - $608,161 $548,141 $ - $548,141
Gross profit 167,447 54,235 221,682 180,773 - 180,773 168,393 - 168,393
Operating
expenses 125,859 39,070 164,929 143,069 - 143,069 140,023 - 140,023
Depreciation &
amortization 30,863 9,587 40,450 30,818 - 30,818 30,311 - 30,311
Operating
income (loss) 10,725 5,578 16,303 6,886 - 6,886 (1,941) - (1,941)
- -
Assets 357,241 - 357,241 275,025 - 275,025 247,846 - 247,846
Capital
expenditures $ 3,946 $ 7,228 $ 11,174 $ 6,874 $ - $ 6,874 $ 6,980 $ - $ 6,980
</TABLE>
* In 1995 the Propane segment had equity income, which is presented in the
Statement of Operations as non-operating income, of approximately $0.7 million
representing the Company's share of income of Star Gas Partners, L.P.
** In 1996 the Propane segment had equity income, which is presented in the
Statement of Operations as non-operating income, of approximately $2.3 million
representing the Company's share of income of Star Gas Partners, L.P.
*** In 1997 the Propane segment had an equity loss, which is presented in the
Statement of Operations as non-operating loss, of approximately $0.2 million
representing the Company's share of loss of Star Gas Partners, L.P.
26
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
(18) EARNINGS PER SHARE
DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Basic Earnings Per Share:
- ------------------------
Net loss $(23,479) $(28,315) $(22,899)
Less: Preferred stock dividends (3,263) (2,389) (4,644)
-------- -------- --------
Loss available to common stockholders
(Numerator) $(26,742) $(30,704) $(27,543)
======== ======== ========
Class A Common Stock 22,711 22,983 23,441
Class B Common Stock 15 12 11
Class C Common Stock 2,598 2,598 2,598
-------- -------- --------
Weighted average number of shares outstanding
(Denominator) 25,324 25,593 26,050
======== ======== ========
Basic losses per share $ (1.06) $ (1.20) $ (1.06)
======== ======== ========
Diluted Earnings Per Share:
- ---------------------------
Effect of dilutive securities $ - $ - $ -
-------- -------- --------
Loss available to common stockholders
(Numerator) $(26,742) $(30,704) $(27,543)
======== ======== ========
Effect of dilutive securities - - -
-------- -------- --------
Weighted average number of shares outstanding
(Denominator) 25,324 25,593 26,050
-------- -------- --------
Diluted losses per share $ (1.06) $ (1.20) $ (1.06)
======== ======== ========
</TABLE>
Certain potentially dilutive securities issued (i.e. options) are not considered
in the above calculation due to the fact that they would be anti-dilutive.
27
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(19) SELECTED QUARTERLY FINANCIAL DATA - (UNAUDITED)
The seasonal nature of the Company's business results in the sale by the Company
of approximately 50% of its volume of home heating oil in the first quarter and
30% of its volume of home heating oil in the fourth quarter of each year. The
Company generally realizes net income in both of these quarters and net losses
during the warmer quarters ending June and September.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
3/31/96 6/30/96 9/30/96 12/31/96 TOTAL
------- ------- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Net sales $279,655 $ 91,345 $ 51,060 $ 186,101 $608,161
Gross profit $100,838 $ 21,952 $ 6,206 $ 51,777 $180,773
Income (loss) before
taxes, equity interest
and extraordinary item $ 42,490 $(24,259) $(38,777) $ (3,138) $(23,684)
Net income (loss) $ 39,041 $(26,152) $(40,593) $ (611) $(28,315)
Preferred dividends (1,194) - (1,195) - (2,389)
-------- -------- -------- --------- --------
Net income (loss) available
to common stockholders $ 37,847 $(26,152) $(41,788) $ (611) $(30,704)
======== ======== ======== ========= ========
Basic and Diluted earnings
(losses) per common share
before extraordinary item:
Class A and C Common Stock $ 1.74 $ (1.02) $ (1.63) $ (0.02) $ (0.95)
Extraordinary (loss) per
common share:
Class A and C Common Stock (0.25) - - - (0.25)
Basic and Diluted earnings
(losses) per common share:
Class A and C Common Stock $ 1.49 $ (1.02) $ (1.63) $ (0.02) $ (1.20)
Weighted average number of
common shares outstanding:
Class A Common Stock 22,862 22,933 23,021 23,116 22,983
Class B Common Stock 13 13 12 11 12
Class C Common Stock 2,598 2,598 2,598 2,598 2,598
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
3/31/97 6/30/97 9/30/97 12/31/97 TOTAL
------- ------- ------- -------- -----
Net sales $248,095 $ 87,972 $ 50,788 $ 161,286 $548,141
Gross profit $ 84,590 $ 23,414 $ 7,582 $ 52,807 $168,393
Income (loss) before
taxes, equity interest
and extraordinary item $ 31,285 $(25,550) $(37,959) $ 10,060 $(22,164)
Net income (loss) $ 33,388 $(27,454) $(40,316) $ 11,483 $(22,899)
Preferred dividends (896) (921) (1,861) (966) (4,644)
-------- -------- -------- --------- --------
Net income (loss) available
to common stockholders $ 32,492 $(28,375) $(42,177) $ 10,517 $(27,543)
======== ======== ======== ========= ========
Basic and Diluted earnings
(losses) per common share
before extraordinary item:
Class A and C Common Stock $ 1.26 $ (1.09) $ (1.61) $ 0.40 $ (1.06)
Extraordinary (loss) per
common share:
Class A and C Common Stock - - - - -
Basic and Diluted earnings
(losses) per common share:
Class A and C Common Stock $ 1.26 $ (1.09) $ (1.61) $ 0.40 $ (1.06)
Weighted average number of common
shares outstanding:
Class A Common Stock 23,150 23,326 23,538 23,751 23,441
Class B Common Stock 11 11 11 11 11
Class C Common Stock 2,598 2,598 2,598 2,598 2,598
</TABLE>
28
<PAGE>
SCHEDULE II
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Additions
Balance ----------------------
at Charged Charge Balance
Beginning to Costs to Other Other Changes at End
Year Description of Year and Expenses Account Add / (Deduct) of Year
- ---- ------------------------- --------- ------------ -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1995 Accumulated amortization:
Customer lists $209,113 $20,527 $ (4,307) (3) $225,333
Deferred charges 34,003 6,142 (1,022) (3) 39,123
-------- ------- -------- --------
$243,116 $26,669 $ (5,329) $264,456
======== ======= ======== ========
$ (3,323) (2)
(250) (3)
--------
Allowance for doubtful
accounts $ 1,769 $ 1,856 $ 917 (1) $ (3,573) $ 969
======== ======= ====== ======== ========
1996 Accumulated amortization:
Customer lists $225,333 $18,611 $ (4,104) (4) $239,840
Deferred charges 39,123 4,760 (237) (4) 43,646
-------- ------- -------- --------
$264,456 $23,371 $ (4,341) $283,486
======== ======= ======== ========
Allowance for doubtful
accounts $ 969 $ 1,882 $1,099 (1) $ (2,862) (2) $ 1,088
======== ======= ====== ======== ========
1997 Accumulated amortization:
Customer lists $239,840 $17,903 $(18,292) (5) $239,451
Deferred charges 43,646 4,639 (1,886) (5) 46,399
-------- ------- -------- --------
$283,486 $22,542 $(20,178) $285,850
======== ======= ======== ========
Allowance for doubtful
accounts $ 1,088 $ 1,853 $1,195 (1) $ (3,156) (2) $ 980
======== ======= ====== ======== ========
</TABLE>
(1) Recoveries
(2) Bad debts written off
(3) Valuation and qualifying accounts conveyed to Star Gas Partners, L.P. and
the disposition of the New Hampshire branch location
(4) Valuation and qualifying accounts conveyed through the disposition of the
Springfield Massachusetts branch location
(5) Valuation and qualifying accounts conveyed through the disposition of the
Hartford Connecticut branch location
29
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except per share data) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
- ---------------------------------------- -------------- ------------
<S> <C> <C>
Current assets:
Cash $ 13,767 $ 2,390
Restricted cash 4,900 -
Accounts receivable (net of allowance
of $1,945 and $980) 38,163 78,987
Inventories 13,997 16,285
Prepaid expenses 10,889 6,203
Notes receivable and other current
assets 996 1,259
--------- ---------
Total current assets 82,712 105,124
--------- ---------
Property, plant and equipment - net 28,799 30,615
Intangible assets (net of accumulated
amortization of $302,095 and $285,850)
Customer lists 56,298 69,265
Deferred charges 22,860 24,924
--------- ---------
79,158 94,189
--------- ---------
Investment in and advances to the Star
Gas Partnership 20,077 27,499
Deferred gain on Star Gas Transaction (19,964) (19,964)
--------- ---------
113 7,535
--------- ---------
Restricted cash 6,900 9,350
Other assets 996 1,033
--------- ---------
$ 198,678 $ 247,846
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
- ------------------------------------------------
Current liabilities:
Working capital borrowings $ - $ 3,000
Current debt 8,021 2,391
Current maturities of redeemable and
exchangeable preferred stock 4,167 4,167
Accounts payable 6,320 14,759
Customer credit balances 28,803 20,767
Unearned service contract revenue 13,599 15,321
Accrued expenses and other liabilities 29,281 32,283
--------- ---------
Total current liabilities 90,191 92,688
--------- ---------
Supplemental benefits and other
long-term liabilities 5,003 5,043
Pension plan obligation 5,683 5,702
Notes payable and other long-term debt 8,514 16,507
Senior notes payable 62,050 63,100
Subordinated notes payable 208,300 209,350
Redeemable and exchangeable preferred
stock 28,555 32,489
Common stock redeemable at option of
stockholder (83 Class A and
21 Class C shares) 656 656
Note receivable from stockholder (656) (656)
Stockholders' equity (deficiency):
Preferred stock-no par value; 1,000
shares authorized, 787 and 0 shares issued
and outstanding - -
Class A common stock-par value $.10
per share; 60,000 shares authorized,
23,882 and 23,606 shares issued and
outstanding 2,389 2,361
Class B common stock-par value $.10
per share; 6,500 shares authorized,
11 shares issued and outstanding 1 1
Class C common stock-par value $.10
per share; 5,000 shares authorized,
2,577 shares issued and outstanding 258 258
Additional paid-in capital 83,046 81,358
Deficit (290,666) (256,365)
Minimum pension liability adjustment (4,646) (4,646)
--------- ---------
Total stockholders' equity
(deficiency) (209,618) (177,033)
--------- ---------
$ 198,678 $ 247,846
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
30
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data) THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
- --------------------------------------------------------------- -------------------------
1998 1997 1998 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 42,113 $ 50,788 $291,479 $386,855
Cost of sales 34,188 43,206 191,508 271,269
-------- -------- -------- --------
GROSS PROFIT 7,925 7,582 99,971 115,586
Selling, general and administrative
expenses 21,162 25,069 64,348 75,103
Direct delivery expense 2,928 3,421 17,410 21,189
Restructuring charges - - 535 1,300
Corporate identity expenses - 1,078 152 3,188
Star Gas transaction expenses 1,029 - 1,029 -
Pension curtailment - 654 - 654
Amortization of customer lists 4,140 4,488 12,966 13,419
Depreciation of plant and equipment 1,767 1,801 5,195 5,352
Amortization of deferred charges 1,041 1,165 3,279 3,469
Provision for supplemental benefits 89 141 268 424
-------- -------- -------- --------
OPERATING LOSS (24,231) (30,235) (5,211) (8,512)
Other income (expense):
Interest expense (8,320) (8,432) (24,805) (25,581)
Interest income 680 681 1,893 1,804
Other 11 27 127 65
-------- -------- -------- --------
Loss before income taxes and
equity interest (31,860) (37,959) (27,996) (32,224)
Income taxes - - 325 350
-------- -------- -------- --------
Loss before equity interest (31,860) (37,959) (28,321) (32,574)
Share of loss of Star Gas Partnership (2,355) (2,357) (1,890) (1,808)
-------- -------- -------- --------
NET (LOSS) $(34,215) $(40,316) $(30,211) $(34,382)
======== ======== ======== ========
Preferred Stock dividends (1,562) (1,861) (4,090) (3,678)
-------- -------- -------- --------
NET (LOSS) APPLICABLE TO COMMON STOCK $(35,777) $(42,177) $(34,301) $(38,060)
======== ======== ======== ========
Basic earnings (losses) per Class A and
Class C Common Stock $(1.35) $(1.61) $(1.29) $(1.47)
Diluted earnings (losses) per Class A
and Class C Common Stock $(1.35) $(1.61) $(1.29) $(1.47)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
31
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
CLASS A CLASS B CLASS C MINIMUM
-------------------------------------------------- ADDITIONAL PENSION
PREFERRED # OF # OF # OF PAID-IN LIABILITY
STOCK SHARES AMT. SHARES AMT. SHARES AMT. CAPITAL DEFICIT ADJ. TOTAL
--------- ------- ------ ------- ---- ------- ---- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
12/31/97 $ - 23,606 $2,361 11 $1 2,577 $258 $81,358 $(256,365) $(4,646) $(177,033)
Net loss (30,211) (30,211)
Cash
Dividends
declared
and paid (4,090) (4,090)
Class A
Common
Stock
issued
under the
Dividend
Reinvestment
Plan 271 27 583 610
Junior
convertible
preferred
stock
issued in
connection
with
exchange
offer - 1,216 1,216
Other 5 1 (111) (110)
Balance at
----------------------------------------------------------------------------------------------------------
9/30/98 $ - 23,882 $2,389 11 $1 2,577 $258 $83,046 $(290,666) $(4,646) $(209,618)
==========================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
32
